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Survey Report

COVID-19 and the longevity hedging market

Chapter two of the 2021 de-risking report

Pensions Corporate Consulting|Pensions Risk Solutions|Pension Board and Trustee Consulting|Pensions Technology

By Sadie Scaife | January 19, 2021

COVID-19 impacted every aspect of our lives in 2020. Sadie Scaife considers how the longevity hedging markets were affected and what the longer-term impacts may be.

As shown in Figure 4, the reporting of death numbers in the UK in 2020 provided a shocking picture, with COVID-19 deaths reaching over a thousand per day in the first peak of the virus with total deaths of double the five-year average in the worst weeks. The scale of the number of excess deaths from the second wave is still emerging in 2021 but what is clear is that there was an increase in mortality rates of almost 15% in 2020 compared to 2019.

During the early weeks of the pandemic, it seemed challenging enough to continue normal life, let alone contemplate undertaking a significant transaction. However, we helped many of our pension scheme clients to do just that.

Volatility in the pricing of corporate bonds provided opportunities for bulk annuity providers to purchase assets at lower prices, allowing schemes who were ready to transact to lock into very attractive bulk annuity pricing. Many of our clients were in that position, and despite some logistical challenges of getting those first lockdown transactions completed, which we share some memories of, they secured very favourable terms.

On the surface, hedging longevity risk during a global pandemic may seem counterintuitive, and we worked with our clients to help them to understand the possible outcomes for a range of scenarios during the initial peak so they could take an informed view on the benefits of proceeding with planned transactions or stepping back. For several larger schemes this included monitoring death numbers and causes of death on a weekly basis, whereas for smaller schemes we looked at liability impacts of shocks such as:

The financial impact of 15% higher death rates in 2020 on pensioner liabilities, equivalent to 90,000 extra UK deaths.
The financial impact of a “Spanish Flu” size impact in 2020 on death rates on pensioner liabilities, equivalent to 300,000 extra UK deaths.

As part of our analysis it was interesting to observe that, in general, pension scheme members were slightly less affected by COVID-19 than the general England and Wales population, and also that the impact varied materially from scheme to scheme, possibly due to the regional variances that were observed in the excess deaths from the first wave.

What’s much harder to quantify is the impact on future improvements in longevity, directly and indirectly, due to the pandemic. We are all hopeful that another national lockdown whilst vaccination programmes are rolled out will begin to bring death numbers down in the coming weeks, whilst some of the increased hygiene awareness, healthier habits and a continuing degree of social distancing, particularly when showing signs of illness or for more vulnerable groups, could mean successive years have lighter deaths experience. Conversely, repeating ‘waves’ of the pandemic and knock-on effects on the treatment of other diseases, coupled with the implications of economic slowdown resulting in less spending on health and care, could reduce the scope for future improvements in longevity. So, although the risk is arguably more weighted towards lower life expectancies due to COVID-19, the level of uncertainty is certainly elevated. In addition, it is likely to be several years before there is a level of understanding of the impact for pension schemes.

Overall, over the course of 2020 we saw the cost of longevity reinsurance stay relatively constant and in some cases reduce marginally – see Figure 5. On one hand, the insurance and reinsurance market has been characteristically cautious when it comes to updating longevity assumptions to reflect the impact of the pandemic, with most holding pricing assumptions constant throughout 2020. This is in line with the Continuous Mortality Investigation’s (CMI) core parameterisation of CMI2020 in which it is placing zero weight on 2020 experience. Overall, CMI2020 is likely to reduce life expectancies by around 0.3%-0.4% compared to CMI2019, which places CMI2020 more in line with CMI2018. In addition, falling risk-free yields put upwards pressure on reinsurance fees. However, increased competition from new providers and falling bulk annuity volumes from the highs of 2019 put downwards pressure on pricing, and several of our clients managed to achieve longevity swaps at minimal cost relative to their Technical Provisions assumptions.

For schemes with a long time horizon or other de-risking to prioritise, it could be argued that retaining longevity risk until the longer term impact of COVID-19 on life expectancy is more certain may be the right strategy. But for schemes who are close to reaching their ‘end game’, be that buyout or run-off, pausing is unlikely to significantly reduce costs, whereas volatility in asset markets may provide very attractive bulk annuity pricing for schemes who are ready to act. In addition, the results of Willis Towers Watson’s Emerging Trends in DB Pensions Survey 2020 showed that 40% of pension schemes are expecting to complete a de-risking transaction within the next three years, so there is certainly the potential for upward pressure on pricing due to supply and demand dynamics in the market.

Next chapter - Memories from Lockdown 1.0


Senior Director, Transactions

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